Remember to Increase your Payroll Contributions
Good news. Once again the IRS has increased the employee contribution limit for 401(k) and other retirement plans in 2020. The contribution limit has been increased from $19,000 in 2019 to $19,500 in 2020 for employees participating in the following types of employer-sponsored retirement plans:
Most 457 plans
Federal government’s Thrift Savings Plan (TSP)
And, to make it even better, employees age 50 and over have an extra opportunity to make contributions in excess of the $19,500 to these types of plans. The limit for these contributions, known as catch-up contributions, is now $6,500 in 2020, up from $6,000 in 2019. In most cases employees who are 50 or older can contribute a total of $26,000 of their own money into the above-mentioned retirement plans in 2020.
Review Your Contribution Elections
If your goal is to maximize your contributions to your employer-sponsored retirement plan, a good rule of thumb is to confirm at the start of each new year that your payroll contributions will continue to reach the IRS contribution limit. When setting your contribution elections, some plans will offer the option to “maximize.” This means your contributions will be evenly deducted from your paychecks for each pay period throughout the calendar year up to that year’s IRS contribution limits.
This can make it easier to ensure you are maximizing contributions rather than having to remember to adjust your contribution percentage each year so that you reach the limit. However, for plans that do not offer a “maximize” option, you may need to speak to a Human Resources/Payroll representative at work to manually adjust your payroll deductions so that you reach the contribution limit by the end of the year.
IRA Contribution Limits Remain Unchanged
Unlike 401(k) and other employer-sponsored retirement plans, the limit on annual contributions to IRAs did not increase in 2020. The IRA contribution limit remains at $6,000 and the catch-up for individuals age 50 and over remains at $1,000. However, IRAs can be considered to be another retirement savings vehicle for individuals looking to maximize their tax-deferred retirement savings.
In fact, under the new Setting Every Community Up for Retirement Enhancement (SECURE) Act, individuals can continue to contribute to traditional IRAs at any age, as long as they continue to have earned income. Previously, individuals could not contribute to traditional IRAs beyond age 70.5. The passing of the SECURE Act creates more opportunity for tax-deferred retirement savings. But do note that certain income phase-outs still apply to the tax-deductibility of traditional IRA contributions
Coordinate Your Contributions with your Financial Plan
There are other important factors not covered in this article that should be considered, including contribution type (pre-tax, Roth, after-tax) and eligibility for tax-deductible contributions. A financial adviser can explain the nuanced rules and various options, and help you to determine how much you should contribute to retirement plans/IRAs based on how they fit in with your retirement goals and your overall financial plan.
At Modera we want to be sure you’re up to date on all the financial legislation that could affect you. If you’d like to discuss your retirement plan contributions with a Modera adviser, please contact us.
Modera Wealth Management., LLC is an SEC registered investment adviser with places of business in Massachusetts, New Jersey, Georgia, North Carolina and Florida. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.
For additional information about Modera, including its registration status, fees and services and/or a copy of our Form ADV Disclosure Brochure, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). A full description of the firm’s business operations and service offerings is contained in our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money.
This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.
Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.